China Cracks Down on Unregulated Exchanges

Jamil Anderlini in Beijing

Thursday, 24 Nov 2011 | 8:17 PM ETFinancial Times

SHARES

The Chinese government has launched a crackdown on hundreds of unregulated electronic equity and futures exchanges that have sprung up in recent years to trade everything from fine art and commodities to insurance products.

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The country’s State Council, or cabinet, published a notice on Thursday announcing a campaign to “clean up and consolidate” the many exchanges that have been approved by local governments hoping to foster financial markets in their jurisdictions.

It said a task force had been set up under the securities regulator to deal with the problem and all exchanges engaged in “unauthorized and illegal” activities would be shut down.

Apart from the country’s two main stock exchanges, three commodities exchanges and one financial futures exchange, no other entity is allowed to list new shares, offer centralized pricing or make markets and no more than 200 investors may hold stakes in a single traded asset, the notice said.

Investors are also banned from reselling an asset from these exchanges within five days.

Even the use of the name “exchange” in Chinese will be strictly regulated from now on and must be approved by provincial-level authorities following consultations with the securities regulator.

“Serious speculation and price manipulation has occurred” at some exchanges and cases of embezzlement and fraud have also emerged, the government said.

Although there is no official estimate for the number of unregulated exchanges or the volume of trading conducted through them, Chinese analysts say there are well over 300 of them today, up from just a handful five years ago.

Last week, three new exchanges were established in the city of Wuhan alone – the Wuhan Shipping Exchange, Wuhan Agricultural and Livestock Products Exchange and Wuhan Financial Assets Exchange.

In the first 10 months of this year, 58 new exchanges were established, according to state media reports.

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Many analysts and industry participants expect most of the exchanges will eventually be shut down and the campaign has already claimed its first casualty.

Beijing-based Hantang Artworks Exchange, where investors could trade shares in precious artworks owned by the exchange, announced on its website this week that it was halting all trading immediately “in the spirit” of the orders from the State Council.

More than 30 similar art exchanges have sprung up in the last few years but most do not appear to have been very successful and some have been mired in scandal and accusations of fraud from the outset.

“I don’t think [the government] will kill all the exchanges in one go and for now I don’t think the impact on our exchange will be that big,” said Mr Wang, a sales manager at Inner Mongolia-based Chifeng Bulk Commodity Exchange, who declined to give his full name. “But it’s true that at times we’ve been playing around the edges and, as an exchange, we hope the state can set up a supervision mechanism to guide the market.”

In the early 1990s, Beijing launched a crackdown on hundreds of equity and commodity futures exchanges that mushroomed across the country and eventually consolidated them into the handful of large, regulated exchanges that exist today.